Charlottetown tax professional Paul Deighan sees the federal government’s reduction of the small business tax rate as positive but also not “overly significant in the greater context of the tax rules that were proposed.”
The announcement of plans to lower the tax rate from 10.5 per cent to 10 per cent in January and then down to nine per cent in January 2019 was made Monday by Prime Minister Justin Trudeau at a press conference in Ontario.
Deighan explained the tax rate reduction would apply to the first $500,000 of active taxable business income. After that threshold of $500,000, the normal tax rate of 31 per cent (15 per cent federally and 16 per cent provincially) on P.E.I. applies.
The Prime Minister was joined by Finance Minister Bill Morneau to talk about the proposed federal business tax changes that were introduced this summer. Public consultations on those proposed changes ended Oct. 2.
They involve limitations on income sprinkling in order to lower taxes by transferring business income to family members in a lower tax bracket. The government said this would not affect family members who work in the business and make a “meaningful contribution.” Trudeau also said the proposed change affecting the lifetime capital gains tax exemption was off the table.
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Deighan, of Grant Thornton, said a concern with the proposed change to converting business income into capital gains is the effect it would have on taxes and estate planning.
As well, with the proposed limitation on the lifetime capital gains tax exemption ($835,716), Deighan said it’s positive that proposal appears to be off the table.
The exemption involves fishing property, farming and a qualifying small business corporation (one that is carrying on an active business). It has been argued that the proposed changes would have made it more costly to sell the business to family members as opposed to third parties.
Deighan added the language involved with income sprinkling and determining what are meaningful labour and capital contributions would make it difficult to advise clients.
“They talked about invoking a reasonableness test. And, the difficulty as an adviser for clients is advising somebody what reasonable is. It all hinges on different circumstance,” he said.
Deighan said people will have to wait and see what is actually changed in the proposals. The other proposed change involves taxation on passive investments (that are not used to reinvest or grow the business).
The plan to reduce the tax rate to nine per cent originally introduced by the previously governing Conservative Party. It was also part of a campaign promise by Trudeau in 2015 (to reduce the tax to nine per cent over three years).
In the 2016 budget, the Conservative’s legislation to reduce the rate to nine per cent was cancelled by Finance Minister Bill Morneau and the rate was frozen at 10.5 per cent.
